With the S&P 500 down nearly 3% for the week as of Friday afternoon, speculation has rising that hedge funds have been selling their large cap portfolio holdings to make up for the losses incurred in the recent short-squeeze rallies.
“The Commission is working closely with our regulatory partners…to ensure that regulated entities uphold their obligations to protect investors and to identify and pursue potential wrongdoing,” the statement said.
The SEC stressed that core market infrastructure “has proven resilient” during this week’s sky-high trading volumes, and warned that extreme stock price volatility has potential to expose investors to severe losses and undermine market confidence.
The GameStop stock price rose as much as 40% in pre-market trading on Thursday after more than doubling the previous day and captivating the financial world.
A battle between hedge funds who had been shorting the company’s shares and day traders on Wall Street Bets on Wednesday pushed the GameStop stock price 134.84% to $347.51. GameStop stock has risen more than 700% in the last 5 days.
The video-game store’s stock up 29.64% to $450.50 in pre-market trading by 6.27am ET.
Day traders, organizing their efforts on Reddit and alternative platform Discord, also drove up the prices of heavily-shorted stocks such as cinema chain AMC, hammering short-sellers. The resulting “loss porn” has caused glee among Wall Street Bets members.
Trading was highly volatile, however, with the stock up around 40% at one point before slipping back. It was set for a less explosive start than on Wednesday, when the price more than doubled at the opening bell.
“Bought at pre-market. Buying more at open. It’s not over til the fat lady sings,” one Reddit user said on the Wall Street Bets forum. Many members rejoiced in the price passing $420 in pre-market, in reference to weed-culture meme.
Other Wall Street Bets targets – many of which have been heavily shorted by hedge funds – fared less well in pre-market trading. A short is a bet that the share price will fall. AMC was roughly flat, Bed Bath & Beyond was down 6.09% and BlackBerry slipped 5.98%.
Nonetheless, said David Madden, market analyst at trading platform CMC Markets, an array of shorted companies “could be in for high volatility again as the short-squeeze tactics might be in play”.
Madden said he thought the GameStop phenomenon was having wider implications in the markets. US stocks were set to open lower after their biggest fall since October the day before, with short-term economic worries and concerns over vaccine shortages hitting confidence.
“Equity markets are lower again as fears that some hedge funds are scrambling to close out positions in a bid to offset painful losses they incurred when shorting certain stocks that underwent enormous rallies,” Madden said.
Discord said on Wednesday it had banned the r/WallStreetBets server for repeatedly violating its policies against hate speech.
“The WallStreetBets server has been on our Trust & Safety team’s radar for some time due to occasional content that violates our Community Guidelines, including hate speech, glorifying violence, and spreading misinformation. Over the past few months, we have issued multiple warnings to the server admin,” a Discord spokesperson told Insider.
“Today, we decided to remove the server and its owner from Discord for continuing to allow hateful and discriminatory content after repeated warnings,” they said.
While the r/WallStreetBets community originated on Reddit, its members have set up a “server” on the group-chat platform Discord where they also discuss stock-trading plans.
Discord’s ban came as the r/WallStreetBets subreddit had been experiencing on-and-off technical issues – including becoming invite-only for around an hour, according to The Verge – as new users flocked to it. The timing of the ban may have briefly made it more difficult for members to discuss trades.
Moderators of the Reddit community slammed the move.
“We’re suffering from success and our Discord was the first casualty. You know as well as I do that if you gather 250k people in one spot someone is going to say something that makes you look bad. That room was golden and the people that run it are awesome,” they said in a Reddit post Wednesday.
“Discord did us dirty and I am not impressed with them destroying our community instead of stepping in with the wrench we may have needed to fix things, especially after we got over 1,000 server boosts. That is pretty unethical,” they said.
But Discord said its decision wasn’t connected to the group’s discussion of trading activity.
“To be clear, we did not ban this server due to financial fraud related to GameStop or other stocks. Discord welcomes a broad variety of personal finance discussions, from investment clubs and day traders to college students and professional financial advisors,” the spokesperson said. “We are monitoring this situation and in the event there are allegations of illegal activities, we will cooperate with authorities as appropriate.”
The stock market volatility caused the White House to chime in Wednesday to say it’s “monitoring the situation.”
“Our team, our economic team, including [Treasury] Secretary [Janet] Yellen and others, are monitoring the situation,” White House Press Secretary Jen Psaki said at a press conference. “It’s a good reminder though that the stock market isn’t the only measure of the health of our economy. It doesn’t reflect how middle and working-class families are doing.”
Financial regulators and the companies that operate the financial markets have also been keeping a close eye on the situation.
Nasdaq CEO Adena Friedman told CNBC Wednesday that the exchange monitors social media chatter, and will halt trading if they match the chatter with unusual activity in a stock.
“In the interest of mitigating risk for our company and clients, we have put in place several restrictions on some transactions in $GME, $AMC, and other securities. We made these decisions out of an abundance of caution amid unprecedented market conditions and other factors,” Ameritrade said in a statement Wednesday.
GameStop, AMC, and Nokia were all down slightly in after-hours trading.
Billionaire Chamath Palihapitiya also joined the Reddit frenzy by excitedly announcing he bought 50 call options in GameStop with a strike price of $115 and an expiration date of February 19.
Scores of WallStreetBets users have driven the video-game retailer’s stock to record highs, while targeting short-sellers like Gabe Plotkin’s Melvin Capital and Maple Lane Capital.
The online stock-investing chat group now has over 2.4 million members. Their battle against institutional short-sellers on GameStop has led to an eye-popping 750% rally in 2021 as retail traders grabbed the opportunity to make money off a short squeeze of institutional investors.
“These are not normal times and while the r/wallstreetbets thing is fascinating to watch, I can’t help but think that this is unlikely to end well for someone,” said Jim Reid, a managing director of cross-asset research at Deutsche Bank.
Legendary investor Michael Burry criticized retail investor behavior on Tuesday for working to boost GameStop’s stock and target Wall Street shorts, calling it “unnatural, insane, and dangerous.”
GameStop shares closed $147.98 a share on Tuesday, but were last trading 105% higher around $301 a share as of 9:50 a.m. ET.
An obsession with the video-retailer by online traders has fuelled outsized volatility over the past three weeks, followed by numerous trading halts. Bullish bets began around the time GameStop agreed with activist investor RC Ventures to add three members, including Chewy founder Ryan Cohen, to its board. The board overhaul was largely seen as a positive for the retailer.
Members on the WallStreetBets community piled into the stock on January 13, encouraging one another to push out short-sellers holding bearish positions. The stock closed 51% higher that same day. A handful of retail traders on TikTok also crowed about how GameStop was going to see frenzied buying again.
GameStop’s shares are up 633% since the end of October and 308% year-to-date. “A wild ride and the retail day traders seem to be targeting and battling institutional shorts at the moment with the former generally winning in recent days and weeks,” Deutsche Bank analysts noted.
What happened with GameStop’s stock is a reminder of how times are changing, according to Edward Moya, a senior market analyst at OANDA.
“A new army of traders are not focused on valuations, but rather by momentum opportunities they see from Reddit’s WallStreetBets, YouTubers, TikTok, or Robinhood,” he said. “Top research shops will now have to consider how millennial traders are positioning themselves. GameStop does not deserve a valuation over $90, but that might not matter if influencers keep retail traders buying.”
GameStop shares rose a further 14% in pre-market trading Tuesday, to $88.83 per share.
An epic short squeeze rally, combined with pockets of investor euphoria found on popular trading forums like Reddit’s WallStreetBets, helped propel shares of GameStop to an all-time high of $159.18 in Tuesday trades.
Cohen amassed a 9 million-share stake in GameStop last year at an average price of $8.43, worth $76 million at the time. At it’s intra-day high today, that stake was worth as much as $1.4 billion, representing a return of more than 1,700%.
But Cohen seems to be playing the long-game on GameStop. Through his firm RC Ventures, Cohen had petitioned the board of GameStop to adopt a strategy that would transform the company into a specialized e-commerce retailer of gaming products.
Cohen utilized a similar strategy for his previous company, Chewy.com, which is a specialized e-commerce retailer of pet products. After being acquired by PetSmart for $3.5 billion, Chewy went public and is now trading at a valuation of more than $43 billion.